New leaders at both the U.S. Securities and Exchange Commission and the Municipal Securities Rulemaking Board may have big changes in store for the municipal bond market and its issuers.

John Cross, left, director of the SEC's new Office of Municipal Securities, and Jay Goldstone, right, the chair of the Board of Directors of the Municipal Securities Rulemaking Board. David Kidd

In 2008, Jefferson County, Ala., was teetering on the brink of bankruptcy after a swap deal on county sewer bonds had backfired. A banker named Charles LeCroy had convinced county officials six years earlier to approve complex transactions, in which fixed interest rates were swapped for adjustable ones. He assured them the move would bring the county cheaper payments in the long run.

“I needed somebody to be able to tell me what all that stuff was,” Larry Langford, a former Jefferson commissioner, recalled during a deposition that June. “And even when they told me, I still don’t [sic] understand 99 percent of it.”

Three years later, the county, which surrounds the city of Birmingham, became the largest U.S. locality to file for Chapter 9 bankruptcy status, citing $4.23 billion in debt -- $3.2 billion of it from the sewer deal that went sour when interest rates moved against the county. Today, more than a decade after LeCroy pitched his swap scheme, the county of more than 650,000 is still slogging through a complicated bankruptcy trial.

Although extreme, Jefferson County’s debacle is an example of the mysteries that can cloak the $3.7 trillion municipal securities market for issuers new to the ways of Wall Street. And it was that event, along with other municipal bankruptcies and the 2008 market crash, that prompted the Securities and Exchange Commission (SEC) to call for a restructuring of the market in a 2012 report. Now, two new bosses in the federal agencies that oversee aspects of the buying and selling of municipal securities are charged with shepherding changes through a wary market.

The Players

Nearly 3,000 miles separate the offices of the SEC’s John Cross, director of the new Office of Municipal Securities, and Jay Goldstone, the chair of the Board of Directors of the Municipal Securities Rulemaking Board (MSRB). From his office at the SEC building in Washington, D.C., Cross, a Louisville native whose voice still carries a soft drawl, can see the congressional office buildings on Capitol Hill. Goldstone, on the other hand, works 25 miles outside downtown San Diego. Recently retired from his post as the city’s chief operating officer, Goldstone now works out of his home, which overlooks the 15th fairway of the Crosby National Golf Club.

Goldstone is a lifetime public servant. It is a role he says he wanted since completing a public service work study program during high school near Minneapolis. While he’s managed the finances for Maricopa County, Ariz., and Pasadena, Calif., Goldstone is best known for helping turn around San Diego. From 2006 until this March, he presided first as chief financial officer and then COO during a tumultuous period in which the city’s credit rating was suspended for years following a pension scandal. Unlike Goldstone, Cross has worked in both the public and private sectors. He was appointed to the SEC last year after six years with the Department of Treasury. Prior to that he spent more than a decade at the national municipal bond specialty law firm Hawkins Delafield & Wood.

Despite their different backgrounds, the two men align where it counts: They both want to make the municipal securities market more accessible and easier to use for issuers and investors.

Disclosure and Price Transparency

To know what to expect from Cross on municipal securities, one need look no further than last year’s SEC report that called for more price transparency and uniform disclosure in the market. “That basically is kind of a to-do list, or road map for the future for priorities, themes and initiatives for our office,” Cross says.

His reasoning for why state and local governments should embrace the idea of more uniform disclosure is basic: It will lead to more liquidity in the market. “There’s a longstanding perception that pricing in the municipal market is opaque,” Cross says. “That may be an overstatement, but there ought to be a lot of ability to come to a consensus from market participants that more transparency and information on pricing is better.”

It’s not as if governments are against better disclosure and clearer pre-trade pricing information -- certainly they acknowledge that untangling some of the rat’s nest that is the pricing of trades in the municipal bond market would encourage more trading and thus net better prices for governments. While they appreciate Cross’s view that new disclosure requirements should be implemented incrementally, they would like to see a more user-friendly way for potential investors to access governments’ most recent, unaudited and audited financial information. (Typically the relevant information for investors is scattered throughout several agencies’ websites in each government.) It is unclear whether such an idea would have localities and states each responsible for creating such an online database or whether the SEC or MSRB should launch something akin to Electronic Municipal Market Access, the MSRB-managed Web resource where municipal offerings and trades are reported.

What issuers are less enthusiastic about is the potential for mandated deadlines to submit audited financial statements, a requirement the SEC has with the corporate market and a recommendation included in last year’s SEC report that also advised legislating disclosure requirements by governments. That would be a tall order for the nation’s diverse group of governments.

The challenge with audited government financial statements is formidable, issuers claim. “You can’t release a financial statement until that last grain of sand is put in place,” says Marty Benison, the Massachusetts comptroller and president of the National Association of State Auditors, Comptrollers and Treasurers (NASACT). For example, Benison said he needs about 660 audited financial statements to put together the state’s Comprehensive Annual Financial Report, including 15 regional transit authorities and all state schools. “It takes a while,” he says. “It’s herding cats.”

Over at the MSRB, Goldstone said the organization’s viewpoint is comparative to the SEC report’s recommendations, although “there may be some [goals] that go further” than MSRB would. On disclosure, Goldstone says the MSRB is “not looking to regulate issuers, to force them to do certain things.” He believes his prior hands-on experience as an issuer makes him sensitive to what’s at stake and the difficulties a lack of top-of-the-line disclosure can create. “Faulty disclosure is really what got San Diego into trouble,” he says. “If we can encourage and inform issuers as to what their disclosure obligations are, that’s a form of protection. Investors are protected by having adequate disclosure and issuers are protected from maybe running afoul of the law.”

Issuer Protection

Just as in Jefferson County, states and localities everywhere are full of well-meaning public finance officials who were trained to balance the books. Most are not, however, savvy in the ways of Wall Street.

In Virginia, there have been times where “you hear about a small locality doing something and you cringe and think, ‘How could they have done that?’” says Manju Ganeriwala, the state’s treasurer and the president of the National Association of State Treasurers. “It’s because they had someone advising them and didn’t have anyone on staff to ask the right questions.”

The notion of issuer protection has always been an underlying goal of the MSRB, and they were given broader responsibilities in that respect under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Goldstone says he’s made it his personal goal during his one-year chairmanship (which ends in October) to step up that mission by seeking input specifically on that topic during MSRB forums. Finance managers for many smaller issuers, Goldstone says, “were never hired to issue debt.” So if the need does come up to raise capital, the process can be daunting.

“For many, it may be their very first time and it’s a very foreign concept. They’re relying very, very heavily on their professionals,” he says. “But that doesn’t absolve the issuers of certain liability and exposure. And so to the extent that we can do outreach and education, I think that’s important.”

Municipal Advisers

A source of frustration in the area of protecting issuers is resolving the Dodd-Frank mandated definition for municipal advisers, the companies that issuers pay to help them navigate Wall Street. The legislation called for the MSRB to write rules to regulate the advisers, but the board can’t do so until the SEC establishes who counts as a municipal adviser. The commission initially issued a definition in late 2010, but it was widely panned as being too broad. More than two years later, issuers are still waiting for a new definition.

Cross has met with many groups, including the association representing state treasurers and NASACT. He won’t say when to expect the new rules, but does say that finishing the definition is a top priority of his office.

“That part’s encouraging,” says Goldstone. “It would be even more encouraging if they actually do take action.”

Goldstone’s sentiment is echoed by finance officers. Virginia’s Ganeriwala expects more action on that front now that Mary Jo White’s nomination to SEC chair has been confirmed by Congress. “When everybody has been appointed, we’ll work to resolve the issues that have been bouncing around the last two years.”

Of course, all sides are cautious about the perception of instituting wholesale changes in the municipal securities market even though most are eager to see adjustments. One of the tricky parts, Cross points out, is that the market actually works rather well.

“Many would say, ‘There’s nothing broken here. What are you trying to fix?’ And there’s some truth to that,” he says, noting that defaults have been limited mostly to small sectors of the market.

That said, there are still stresses -- some have come to light thanks to the SEC’s three-year-old Municipal Securities and Public Pension Unit within its enforcement division that has already reached settlements with Illinois, New Jersey and Harrisburg, Pa., for securities fraud. More enforcement actions are expected in the future as the unit pursues its mission. “The financial crisis,” Cross says, “particularly underscored potential liquidity stresses in this market and the need to pay attention to increasing transparency of pricing and disclosure.”